Chapter 7
Case 1
Swisher Mower and Machine
Company
Background
 1996 Wayne Swisher, President and
CEO received a certified letter from a
major national retail merchandise
chain inquiring about a private-brand
distribution arrangement for SMC’s
line of riding mowers.
Wayne Swisher had only recently
assumed his position as president and
CEO.
Background
 The private-brand distribution proposal
was first major decision he faced as
president and CEO.
 He thought the inquiry presented an
opportunity worth serious consideration.
 Unit volume sales of the SMC riding mower
had plateau in recent years.
 Details concerning the proposal would have
to be closely studied because it represented
a significant departure from SMC’s current
distribution practices.
Background
 The Swisher Mower and Machine company
can be traced to the mechanical aptitude of
its founder MAX Swisher.
 He received his first patent for a gearbox
drive assembly when he was 18 years old.
 He started selling mowers to his neighbor
after converting his parents’ garage in a
small manufacturing operation.
 He formed Swisher Mower and Machine
company in 1945.
Background
 1950s Swisher decided to integrate his
drive machine into riding a mower
 1956, he started selling these mowers
under the Ride King name.
 1966, unit volume for SMC riding mowers
peaked at 10,000 with sales of $2 million.
 1970s sales volume began a downward
trend as a result of poor economic
conditions in the geographic market served
by SMC.
Background
 1975-1989, unit volume remained
relatively constant.
 1990s sales improved with an average
unit volume of 4,250 riding mowers.
 1995, the company sold 4,200 and
recoded total company sale $4.3
million.
Background
 Max Swisher has always insisted that his
company be customer-oriented in
recognizing and providing for both dealer
and end-user needs.
 Maintaining a small company image had
also been an important aspect of Max
Swisher’s business philosophy.
 This philosophy has resulted in personal
relationships with dealers and customers
alike.
Background
 A special loyalty has been
demonstrated to the original SMC
dealers and distributors that helped
build the sales foundation of the
company.
Product Line
 SMC produced three types of lawn mower
units in 1996.
 Ride King, trail-mower T-44 and Push
Mower.
 The manufacture’s list price for a standard
Ride King is $650.
 Gross profit margin on this unit is 15%
 Reputation high quality, simple design and
easy maintenance.
 SMC often run for 25 years before having to
be replaced.
Product Line
 Most current mowers’ parts are
interchangeable with the parts of older
models that date back to 1956.
Product Line
 push mower kits, trail-mowers and riding
mowers.
 It is also in the process of developing a new
product – all-in-one trimmer, edger and mower.
 80% of the parts business is generated from the
sales of the riding mowers or their spare parts.
 SMC’s company’s performance is largely dictated
by riding mower sales.
Distribution and Promotion
 The current market segment served by SMC is mainly
industrial users located in the non-metropolitan areas
(75% of the company sales).
 SMC employs three different mechanisms for distribution;
through wholesale distributors who in turn supply to
independent dealers, directly to dealers and through
private-labelling arrangements for two buying networks
(Midstates and Wheatbelt).
 They also have a small presence in Europe and the South
Pacific. For the vast American west and pacific region, it
virtually has no presence.
 SMC has not made any significant attempts to move into
the metropolitan areas.
Distribution and Promotion
 By accepting the Private-Brand
Offer, SMC will be able to revive its
stagnant business and immediately
 increase sales volume by two folds,
from current annual sales of 4,200
units to 12,400 units.
 Sales for spare parts will also
increase correspondingly.
Distribution and Promotion

In addition, by tapping onto the larger distribution network of
the chain, SMC can expand its business into the northern and
western United States.
 At the present, most of SMC’s distributors are located at
central and eastern United States.
SMC is currently under-utilizing its facility at only 42% of total
production capability.
 Accepting the offer will increase machine utilization rate (based
on depreciation expenses) from $0.15 / unit to $0.55 / unit.
Distribtion and Promotion
 The offer will also lower the current sales and administration
expenses rate, as the Chain will supply all advertising related to
the private-branding product.
 SMC need not have to employ additional sales representatives.
If this private-branding opportunity turns out well,
both parties are likely to extend the boundaries of
the contract.
 Future contracted annual volume may increase, and
SMC can even introduce more products to be
included in the distribution.
Distribtion and Promotion
 For instance, SMC can bring in its new product, Trim-Max to the
expanded distribution network.
Both parties are not bounded by the contract in the long term.
In the event that actual losses are more than expected in the
first six months, SMC can terminate the contract by giving a 6month notice and minimize future losses.
 On the other hand, it is unlikely that the Chain will not go for a
long-term relationship with SMC.
 Set-up cost of getting another supplier is high, and ultimate
customers may be dissatisfied if products were terminated.
Problems: Accepting Private-Brand Offer
 With broaden distribution and higher volume as a
result of taking up the private branding offer, there
will be greater exposure to liability claims,
 although SMC has not experienced any significant
product-liability claims for products sold or used
since 1956,
 thus unlikely that the risk of exposure will increase
substantially in the short term.
Problem of Accepting Private-Brand
Offer
 In addition, existing sales can be cannibalized by
private-label sales.
 although the negative impact on the income
statement as a result of the cannibalization is not
material.
 SMC will have to incur additional costs to finance
its higher cash requirement due to higher inventory
and accounts receivable level as a result of taking
up the offer.
 Financing costs is expected to increase by $78,000
and $59,000 respectively, assuming current 60
inventory days and 45 days credit term.
Cons
of Accepting
Private-Brand
Problems:
Accepting Private-Brand
Offer
Offer
 With private-branding sales, SMC will be able to
operate at 24% above its existing production
capacity.
 If demand were to increase in the future, the factory
may not be able to cope with the higher requirement.
 SMC may need to consider expanding its production
facilities in the future.
 In addition, accepting the offer will result in
increasing its private-branding sales from existing
40% of current sales to 80%.
 Such over-reliance on private-branding sales is
dangerous if the organizations were to terminate the
contract suddenly.
Cons
of Accepting
Private-Brand
Problems:
Accepting Private-Brand
Offer
Offer
 the most damaging factor is that SMC would suffer
huge income losses if the offer were accepted.
 In fact, further calculations would show that the
company would continue to see financial difficulties
for the next 10 years.
 Profit would only be made from the eleventh year
onwards.
 Thus, based on financial grounds, the offer should
not be accepted.